Sep
22

How Banks Make Money & Why Real Estate Will Come Back Quickly

Filed Under Real Estate Investing 

Last week the Bush Administration proposed a $700 billion to $1 trillion rescue plan for the financial and real estate industry.  The heart of the plan is to purchase bad debt/loans from the lenders thereby relieving their bad loans so they can concentrate on making good loans (talk about a bailout funded by the taxpayer).

Personally it is appalling that the government is going to spend 1 trillion dollars of tax money to bail out the banks.  This is the equivalent of you or I running up $250,000 of credit card and short term debt and the government wiping the debt clean.   Sure… it is great for the bank but don’t forget the bill is being footed by you and I the taxpayer. Plus, pumping huge amounts of dollars into the economy is a devaluation of our currency giving us less buying power.

I’ve been a broken record that there has never been a housing crisis… just a money shortage that has been manufactured. Setting aside my personal opinion if we look at this from a purely selfish business standpoint as a real estate investor it can be a very good thing.

The Banks Make Money Making Loans.

If you don’t understand Fractional Reserve Banking you are handicapped in understanding the big picture - there is a good definition at http://en.wikipedia.org/wiki/Fractional-reserve_banking.

To summarize fractional reserve banking means the bank’s loan money without having any of their own money collateralizing the loans then the banks collect interest and fees money created out of thin air.  If you deposit $10,000 the bank is able to make a loan of $80,000 and the bank collect points, interest and fees on money that did not cost them anything.  Their investment is ZERO in the loan.  I know this might sound crazy… but look it up and research the subject.

The important thing to remember is banks are in the business of making loans.  With the tightening of money lending the strong banks are not only surviving but they are now getting government bailouts and when they start lending again in mass the surviving banks will have increased profits because of decreased competition.

The one trillion dollar bailout for the economy signals a green light for the banks to start lending.  The government is not only taking the banks bad debt off the books but the government has taken over Fannie Mae and Freddie Mac which currently buys approximately 90% of the loans on the open market.  The translation is we have a taxpayer bailout AND the taxpayer through Fannie Mae and Freddie Mac will be buying the majority of the new loans!

What To Do Right Now?

Realize that a speeding locomotive does not stop on a dime.  Foreclosures will continue to rise and be offset by buyers coming back into the markets.  With time the course of direction will be turned as buyers rush to the market and properties will regain their values quickly.

As a real estate investor stay close to the action.  Be on the lookout for real estate deals that can be bought for a fraction of their value, bought ’subject to’ and kept as profitable rentals, or for your own personal residence that can be bought at prices not seen in over a decade.  If you need to analyze deals or create any of the necessary paperwork check out The Ultimate Real Estate Investing System.

Author: Gerald Romine

Comments

2 Responses to “How Banks Make Money & Why Real Estate Will Come Back Quickly”

  1. Gerald Romine on September 22nd, 2008 8:37 pm

    Mitchell Asked:

    “If that’s the case why did the banks lower my credit limits on HELOC”

    Gerald Romine Answers:

    There could be several reasons including:

    1) The value for your home is lower now then when the HELOC was approved. For instance you could have a first of 100K and a HELOC for 50K and the home is currently worth 130K. The lender may lower your HELOC to make sure they have adequate security on your loan.

    2) Your credit score may have lowered making you a higher risk.

    3) The lender may be lowering their overall liabilities and decreasing your loan is part of that action.

    4) The lender may have re-evaluated the loan or their HELOC portfolio and changed their lending guidelines.

    The reasons the lender may have lowered your HELOC are many. Be glad you still have a HELOC you can draw money from. I’ve had friends who had HELOCs with zero balances that were terminated.

    Gerald Romine

  2. haroldebeale on September 29th, 2008 2:10 am

    What has happened with our economic system is not a surprise to those who understand our banking system. Simply put, banks create debt money out of thin air (yes, you read it right) that is based on a promise to repay principal and interest. However, there is not enough money in the system to repay the principal and the interest owed. The interest owned will never be paid based on the current banking system.

    The Federal Reserve Act of 1913 and the New Deal under President Roosevelt, that buttressed the desires of the international bankers, are the absolute source of this country’s ongoing economic problems – no question, no doubt. The Federal Reserve Bank (and there is nothing federal about it; it has been declared a private corporation by the Supreme Court of the United States) cannot help the problem unless it dissolved itself.

    I therefore encourage you and your readers to view the following videos (two or three times to dislodge the mis-education we have received through the outlets of indoctrination (schools, media, etc.). This is education that you will never get in school. Most people do not know about the truths revealed in these videos. In general, most people don’t know how money comes about and it’s actual worth, who actually controls the money supply, and how this control impacts our lives in ways never imaged. Watch, listen, learn, and share this with others you care about. May the Truth be with you always …

    Money as Debt, By Paul Grignon http://video.google.com/videoplay?docid=-905047436
    (This is a great introductory primer before getting into he meat and potatoes. Among other things, learn how loans are not really loans – this will be interesting for the homeowner and the investor alike. 47 min.)

    Money, Banking and the Federal Reserve
    http://video.google.com/videoplay?docid=-466210540 (Direct and to the point about the banking system. 41 min.)

    The Money Masters: How the International Bankers Gained Control of America http://video.google.com/videoplay?docid=-515319560
    (This is a must-see. Take time out of your busy schedule to learn the truth about why “We the People” will never get out of debt based on our current banking system. 215 min.)

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